Your browser does not support the PubReader view.
Go to this page to see a list of supporting browsers.
Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 12, No. 4, pp.311-346
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 1999
Received Nov 1999 Revised Dec 1999

Finance and Economic Activities

Jisoon Lee
Professor, School of Economics, Seoul National University, Seoul, 151-742, Korea, Tel: +82-2-880-6476, Fax: +82-2-886-4231 jisoon@snu.ac.kr

JEL Classification: E44, G10, O16

Abstract

This paper reviews the roles and limits of finance in modern economies.

Finance improves the efficiency of resource allocations. It does this by first correcting market failures and second by making markets function better. Finance also contributes toward economic growth and development. Finance does this by making more efficient investments and faster technological progress possible.

Finance, when it malfunctions, can bring serious economic disasters. Because of the asymmetry of information inherent in financial transactions, and because of the ability of the most important segment of the financial industry to create credit, finance may break down under certain conditions. When finance breaks down, it can easily bring the entire economy into trouble because finance is so pervasive.

Finance can malfunction, too, when the policy environment surrounding the financial markets and systems are so ill-designed as to give them wrong incentives. Here, financial controls used by developing economies often turn out to be the real causes for the breakdown of finance.

One of the key reasons why finance may malfunction has to do with poorly working corporate governance mechanisms. When mechanisms governing the behavior of financial institutions and markets, the lenders and the intermediators, do not work properly, the latter are very likely to malfunction. When financial markets and institutions malfunction, they can easily bring trouble to the real economy. When mechanisms governing the corporate sector, the investor-borrowers, do not work properly, the real sector could breakdown. And when the real sector breaks down, financial systems and markets could breakdown, too.

The paper also compares different modes of corporate governance being used in Korea, Japan, and America.

Acknowledgments

I wish to thank the anonymous referees for their helpful comments. All remaining errors are mine.

References

  • Aoki, M., and Kim, H. Corporate Governance in Transitional Economies. The World Bank, 1995. [https://doi.org/10.1596/0-8213-2990-1]
  • Aoki, M., and Patrick, H. The Japanese Main Bank System: Its Relevance for Developing and Transforming Economies. Oxford University Press, 1994.
  • Arrow, K. “The Role of Securities in the Optimal Allocation of Risk Bearing.” Review of Economic Studies 31 (No. 2 1964): 91-6. [https://doi.org/10.2307/2296188]
  • Bagehot, W. Lombard Street. Charles Scribner's Sons, 1887.
  • Becsi, Z., and Wang, P. “Financial Development and Growth.” Federal Reserve Bank of Atlanta Economic Review (1997): 46-62.
  • Becsi, Z., and Wang, P. and Wynne, M. “Costly Intermediation and the Big Push.” Working Paper 98-16. Federal Reserve Bank of Atlanta, 1998.
  • Bencivenga, V., and Smith, B. D. “Transaction Costs, Technological Choice, and Endogenous Growth.” Journal of Economic Theory 67 (1995): 153-77. [https://doi.org/10.1006/jeth.1995.1069]
  • Debreu, G. The Theory of Value. Wiley, 1959.
  • Fama, J. “What's Different about Banks?” Journal of Monetary Economics 15 (No. 1 1985): 29-40. [https://doi.org/10.1016/0304-3932(85)90051-0]
  • Gertler, M. “Financial Structure and Aggregate Economic Activity: An Overview.” Journal of Money, Credit, and Banking 20 (No. 3 1988): 550-88. [https://doi.org/10.2307/1992535]
  • Goldsmith, R. Financial Structure and Development. Yale University Press, 1969.
  • Gurley, J., and Shaw, E. “Financial Aspects of Economic Development.” American Economic Review 45 (No. 4 1955): 515-38.
  • Hicks, J. A Theory of Economic History. Clarendon Press, 1969.
  • Lee, J. “Causes for Business Failures: Understanding the 1997 Korean Crisis.” Journal of Asian Economics 9 (No. 4 1998): 637-51 [https://doi.org/10.1016/S1049-0078(98)90068-9]
  • Levine, R. “Financial Developments and Economic Growth: Views and Agenda.” Journal of Economic Literature 35 (June 1997): 688-726.
  • Lucas, R. “On the Mechanics of Economic Development.” Journal of Monetary Economics 22 (No. 1 1988): 3-42. [https://doi.org/10.1016/0304-3932(88)90168-7]
  • McKinnon, R. Money and Capital in Economic Development. Brookings Institution, 1973.
  • Merton, R., and Bodie, Z. “A Conceptual Framework for Analyzing the Financial Environment.” In D. Crane et al. (eds.), The Global Financial System: A Functional Perspective. Harvard Business School Press, 1995.
  • Pagano, M. “Financial Markets and Growth: An Overview.” European Economic Review 37 (1993): 613-22. [https://doi.org/10.1016/0014-2921(93)90051-B]
  • Robinson, J. “The Generalization of the General Theory.” In The Rate of Interest and Other Essays. MacMillan, 1952.
  • Schumpeter, J. The Theory of Economic Development. Translated in 1934, Harvard University Press, 1912.